Why you must teach your children about money

Former GRS staff writer Donna Freedman has been researching the importance of teaching children about money, and she asked if she could share some things she’s learned. This is the first of two articles on the subject. Donna writes for Money Talks News and blogs about money and midlife at DonnaFreedman.com.

While researching a magazine article on “raising money-smart kids,” I felt sorry for parents and terribly worried about their children. (Also greatly relieved that I am not raising kids today.)

The article, for Consumers Digest, ran to a few thousand words. Short form: Our children face serious money temptations and pressures, and generally receive very little useful info either from parents or schools.

They also face consequences more serious than their parents ever did. We’re not talking about a few bounced checks or some other financial oopsie that you remember from your own early adulthood. An 18-year-old without sufficient financial savvy could within five years find himself:

Saddled with several decades’ worth of student debt

Paying double-digit interest on an auto loan

A victim of identity theft

Unable to get a mortgage

Looking at seriously underfunded retirement

Sound grim? It could be, but it doesn’t have to be. You can help your kids avoid years of financial struggle by consistently modeling certain basic money principles.

Today’s tykes are affected by a consumerism-drenched culture, and keeping up with the junior Joneses is a battle that gets more fraught every year. Even if your child doesn’t know someone who gives out $150 birthday favors or rents a limo for the junior-high dance, he’ll see similar excesses on social media or shows like “The Rich Kids of Instagram.”

Prepaid debit cards are marketed to impressionable tweens who then develop a taste for plastic a decade earlier than the previous generation. (One is actually called “Bill My Parents.” So help me.) It doesn’t help that plenty of today’s kids grow up watching parents swipe cards to pay for everything from a gallon of milk to a new dining-room set.

Most troubling of all: Our children will have to think about credit scores and self-funded retirements almost before the ink is dry on their diplomas – and those degrees now come with an average of $29,400 in debt, according to the Institute for College Access & Success.

That’s a lot to consider, and frankly some parents don’t feel up to the challenge. But if you want what’s best for your kids, it’s time to lean in. According to a 2013 study from Cambridge University, our money habits are formed by the age of 7. While it is possible to modify our behaviors later on, it’s easier to build a money-savvy kid than to fix a financially busted grownup.

‘Negligible effects’ on behavior

The youth financial literacy movement that began in the mid-1990s created a lot of sound and fury. Yet it signified virtually nothing, for two reasons:

There’s no guarantee your child will receive instruction. Currently only 17 states require some form of PF education during high school. It may not even be a stand-alone class, but rather a component of another subject (e.g., civics).

Recent research suggests these classes don’t work anyway. A 2014 study published in the journal Management Science analyzed 168 papers covering 201 previous financial literacy studies. It concluded that even “many hours” of high school PF classwork “have negligible effects on behavior 20 months or more from the time of intervention.” (Just ask J.D. Roth, founder of Get Rich Slowly. He did well on his high school PF class tests and wound up in major debt anyway.)

At the first meeting of the new President’s Advisory Council on Financial Capability for Young Americans, council member Richard Cordray stated that he will “insist on financial education at all schools,” from K-12. (He is also director of the Consumer Financial Protection Bureau.)

That was in late March 2014. It’s unclear when such a project might be implemented. After all, the much-discussed Common Core educational standards originated from a 2006-07 initiative, but the curricula were not available for adoption until 2010.

What’s also unclear: whether a new approach will make any difference. (See “negligible effects on behavior,” above.)

Money comes from work

Even if those classes do get implemented – and actually work – parents still wouldn’t be off the hook. Would you let one sixth-grade health class about the birds and the bees provide the only information your kids get about love and relationships? Then don’t rely on schools to reflect your own money values, either.

For example, a class might presume that a two-income household was the norm, whereas in your family it’s important to have an at-home parent. Emphasizing the day-to-day tactics that stretch a single salary could teach a lot about smart money management – and also why the sacrifice is worth it. And if the at-home parent is also starting his or her own part-time business, kids could certainly learn a lot about the ups and downs of entrepreneurship.

Individual circumstances aside, all the financial experts with whom I spoke agreed that children should learn:

Money also pays for emergencies and long-term goals, which means a portion of each paycheck must be saved.

Money is a limited resource, so you must make careful choices about how to use the cash you have.

Tips should be age-appropriate, of course. There’s no point in discussing mortgage points with a kid who can’t even stay dry at night. But even the weekly trip to the grocery store can yield lessons. Your 3-year-old can match coupons to products. An 8-year-old can search for the best deals on pasta or peanut butter. You can even bring up wants vs. needs: “We don’t get what we want every week, but this week we’re going to buy ice cream.”

Here’s a phrase to avoid: “We can’t afford that.” Don’t make your kids think you’re poor (even if you are). Instead, say, “That’s not in the budget right now.” This promotes the idea of spending as something that you plan and follow through on vs. giving in to temptation (or pleading).

“Every time you spend money you are making a choice,” says Gail Hillebrand, the CFPB’s head of consumer education and management. “It’s not, ‘I have some money in my pocket I can spend’ – it’s ‘I am making a choice about my family’s budget every time I spend’.”

Over time, children observe the results of those choices: “Those kids see their parents scrimping and saving – but they also see their parents making that down payment on a home or paying cash for a car.”

Pocket money: earned or given?

Thus the family budget should be a mostly open book. You don’t have to share everything, i.e., you don’t have to tell them exactly how much you earn. Simply explain that X percent of income covers the family’s essentials and the rest gets apportioned among other categories. Depending on your situation, these may include:

Savings/emergency fund

College accounts

Retirement

Future goals (e.g., pay cash for the next car)

Family fun (including saving up for electronics or vacations)

About that last: It’s vital that children learn the concept of saving up for non-essential items. Watching parents set aside $100 per month is a good example: By the time school lets out we’ll have enough to go to Six Flags! Experts suggest creating a visual representation of the goal; allowing kids to chart the family’s progress toward that summer trip gives a sense of pleasurable anticipation as well as cause and effect.

Children should be saving on their own, too, starting as early as age 2 or 3. Many PF experts suggest the “three jars” method: saving, spending and giving. Have your kids divide those coins or dollar bills among the jars, specifying at least 20 percent for saving. (gift money goes there, too – thanks, Grandma!). Emphasize the ways that saving gives us options: to handle emergencies, pay cash for an auto, buy a home, have a comfortable and happy life.

Let the kids determine where the giving-jar cash goes: a church collection plate, the food bank, an animal charity. When it’s time to go shopping, telling Junior to bring his spending jar is “a wonderful way to stop the whining,” notes Jean Chatzky, author of “Not Your Parents’ Money Book: Making, Saving and Spending Your Own Money.”

Where does this money come from? An allowance, probably: A 2012 study from the American Institute of Certified Public Accountants indicates that 61 percent of U.S. parents give money to their kids on a schedule.

Most money experts believe that allowances should be earned, e.g., for doing household chores or feeding the pets. Some advocate a “blended” approach, in which children get a relatively small sum plus the chance to earn more via special chores. Rachel Ramsey Cruze, who co-authored “Smart Money, Smart Kids: Raising the Next Generation to Win With Money” with her financial-guru father Dave Ramsey, grew up with “commissions” vs. allowances. All money had to be earned, first through chores and later through babysitting and other jobs.

Kids who earn most of their spending cash are more likely to understand the connection between “work” and “money,” according to Cruze. They’re also more likely to “treat their things better when they pay for it vs. when it was just given to them.”

Parents should gradually cede control of their children’s expenses to the kids themselves. The emphasis is on “gradual.” You shouldn’t expect a 9-year-old to budget and shop for her own school wardrobe, but she could be given enough to cover iTunes downloads, treats away from home and birthday gifts for friends.

Explain that there will be absolutely no bailouts. (Chatzky liked to remind her kids that their future bosses wouldn’t advance them their salaries.) So if Junior spends half his school clothing money on a single pair of shoes, then it’s up to him to learn to stretch what’s left. When your daughter chooses to blow the budget the first week, the corollary choice is having to skip a birthday party at the end of the month – unless, of course, she wants to take on extra chores to earn the money for a present.

“The only way to raise kids to be financially responsible is to allow them to make their own decisions and then to live with the consequences of those decisions,” says Mary Hunt, author of more than two dozen books including “Raising Financially Confident Kids.”

She used a monthly vs. weekly allowance because it taught her two sons to plan ahead. Hunt says if she had to do it over again she’d impose a 15 percent tax to get them accustomed to the idea of take-home pay vs. salary. (Now that’s some tough financial love!)

What I love about this post is that it focusses on what parents can do rather than leaving the work to the schools. Being taught something in school is very different from experiencing it first hand. (I’m not saying personal finance shouldn’t be taught in schools — rather, it’s one piece of the puzzle)

I understand people look to schools as the solution because many people don’t have these skills to teach their kids. (Why they think teachers do is a whole other issue!) Maybe schools, churches, community groups, volunteers, etc. could work on educating the whole family. Kind of like how programs teach parents and kids how to cook healthy meals together.

The single most important thing to learn about managing your money is that interest grows very large over time. This is true for debt and this is true for savings. The answer to both is delaying gratification today for a better tomorrow.

Unfortunately, our brains aren’t fully developed until our mid to late 20s; well after we can get a few credit cards and pay too much for school. No matter how good the course is it’s going to be challenging to get a 16 year old to put the money in a Roth than into a new iPad.

Thank you for this post! My two take-away points:
1. Stop using language like, “We can’t afford it.” I do that all the time : (
2. Build some “earn your income” opportunities into our teen daughter’s monthly allowance.
I’ll be putting this advice into action. Much appreciated!

I think that it is imperative that parents not let their children deficit spend when giving them any kind of allowance, whether it is weekly or situational (like a clothing allowance). It just enforces the idea of being in debt is ok. It also doesn’t give them the necessity to plan and organize their finances.

One tip for really small children is to have a change jar that you save spare change and count every four to six months and then see how you can use that money for family fun. It is a tangible way for them to see how savings is important and then they get to be part of managing where that money will be used.

I also think that kids should get a job as soon as they are able (for at least a few hours a week) and be responsible for paying for some of the things they are using, like car insurance and/or cell phone. It is amazing how much more they value things when it is their money. And I know there are parents out there who would argue that they want their kids to concentrate on their school work. I call BS on that because 95%-98% of those kids will never use their extra time for more school work.

This article covers a lot of ground, and there’s a lot that I’m tempted to comment on. But I’ll just say that it makes me really sad whenever I see parents talking with glee about how they set their children up to fail so they can learn a lesson and “live with the consequences.” Especially when those consequences include having inadequate clothing to wear to school. Who does that?

Don’t trick your kids into making bad decisions – teach them to make smart ones. Talk to them about their decisions, and help them anticipate any consequences that they might not have thought of themselves.

I actually would let my daughter live with the consequences if she chose to spend her clothing money on something other than clothing (provided she had enough other clothing to get her through the school year, of course).

One thing I’ve noticed with my five-year-old is that she learns best by experiencing things first-hand, good or bad. I never intend to trick her, but I will let her make mistakes from time to time. That’s how she learns. Every child is different though.

I see your point. But John Steinbeck once wrote that he saw his hangovers as a CONSEQUENCE, not a punishment: If I do X, then Y will follow.
Same here. If my kid had $500 to spend on school clothes and decided to spend half that amount on some stupid designer jeans and another $100+ on fancy sneaks, she would live with the consequences of having just $150 left for everything else.
As in, “Check the thrift stores — some amazing stuff there if you keep looking.” Or “babysitting a few Friday and Saturday evenings should earn you a fair bit of coin.” Or “your grandma will pay you $50 if you spend most of the day Saturday helping her clean out and organize the attic.”
But if I heard her wail, “I only have $150 and most of last year’s shirts are worn out/don’t fit!” then my reply would be, “Hmmmm. How did that happen, again?”
She’s not failing. Nor is she falling. She’s just stumbling.

But she wouldn’t have to fall or fail OR stumble if her parents would take notice when she’s heading toward a stupid decision and say “Are you sure you want to spend 2/3 of your clothing budget on one pair of jeans and one pair of sneakers? Maybe we’d better sit down and draw up a budget” rather than “You do whatever you want with your own money, and the consequences are not my problem.”

What if she decided she wanted to spend her entire clothing budget on jeans and sneakers, leaving no money left for anything else? How big a fall does she need to be heading toward before you’d step in and say “Are you sure you want to do that?”

I’m not saying that parents need to hover over their children at all times to protect them from the slightest hurt feeling. But I do think that children should be able to trust their parents to give good advice when appropriate, especially when the children are navigating experiences that are new to them.

I didn’t mean just to throw them to the retail wolves! Instead, I was operating on the assumption that parents would, in fact, have some input — but BEFORE the actual shopping trip, in the form of their explaining (and modeling) the idea of budgeting.
For example, “We’d love to go out to eat every meal, but we have other places for our money to go so we have to think about that.” Or “It would be great fun to visit Europe but now that you’re in high school Dad and I decided to add extra money to your college savings plan.”
And that yes, before the shopping trip they’d remind the child, “Remember, this has to cover ALL of the things you need or want. If you spend way too much of it on one or two items, that means you won’t have much left for anything else.”
Hope that clarifies my position a bit.

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Bethsays:

24 July 2014 at 2:53 pm

I agree with Donna — you can guide your kids, but you can’t guarantee they’ll listen.

My siblings and I used to get a certain amount of money to spend at the book fair. I wanted to buy this big book my mom didn’t think was worth the money. She pointed out: “you can spend all of your money on one big book, or you can buy two or three smaller books.”

For some reason, I had to have that book, so she let me make that mistake. Later I was jealous that my brother got two books instead of one and was reminded of my decision. It wasn’t an “I told you so” rather, “this is the decision you made so you might as well make the most of it”.

I used to work with teenagers. They’re going to make plenty of less-than-ideal decisions even when parents and teachers are there to advise them. In fact, sometimes they’ll make a bad decision just to spite you. I think there’s something to be said for learning to deal with negative consequences, not just avoiding them.

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AMWsays:

24 July 2014 at 2:54 pm

Johanna, I don’t know of any parent who throws their children to the wolves. However, when you have spent years walking your kids through the process and they finally get to go on their own and don’t listen, and when they blow their money on a single item and you suggest that they return it and tell them they have to live with the consequences and they don’t do it…if you don’t let them live with the consequences then they only learn that they can do whatever they want and mom and dad will bail them out. Isn’t it much better for them to learn this lesson with a pair of jeans than with a car payment or mortgage? And when will they have to live with the consequences of their actions?

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Marciasays:

24 July 2014 at 6:39 am

I think that family financial ed is very important, too! And financial ed does need to be taught in schools. Hopefully with both in place this will benefit the students for the rest of their lives!

I really like the idea of a monthly allowance system. It is easier for the parents to maintain and teaches the kids to plan ahead. You are right, bailouts are counter-productive!

I’ll never forget the day that one of my students came into my small reading class and talked on and on about how payday loan stores were so awful! Apparently, his folks were battling a big problem with them at the time. Until he got to say his peace we couldn’t proceed with instruction for the day. I felt badly for him and his family.

One of the initiatives I have been working on is called Summer Money Camp, a 10-day workshop series to help young adults (high school to college-age 15-23) figure out what they want to do in their lives and how to pay for it. We have referenced Get Rich Slowly every day.

Since our school district and state (Michigan) doesn’t mandate personal finance, it is elective here but with college-prep curricula/mandates pushing aside electives, it is a hard sell to get a kid to take an accounting or money-management class.

We’ve had major buy-in from area financial professionals, business organizations, colleges and parents but getting more than a handful of students to show up has been tough sledding.

Thank you Linda. I met with a local superintendent on May 30th of this year with a minimal sketch of an idea and by the 4th of July we had a roster of presenters lined up and went “live” with our first day of workshops on July 7.

We hope to get it integrated into the curricula here or result in an expansion of the ACT prep class here and offer it to other districts when refined so there is hope for your daughter AC.

The speed in which it could be put together only speaks to the demand that is out there from parents, employers and some of the kids themselves to get more practical skills.

Some of the high school students here see their older siblings moving back in with them after college because their debt is so high that they can’t claim their older sibling’s old room anymore because it is their room again.

Our college attendees see their classmates having a hard time thriving after college because they took forever to graduate, took on unmanageable debt or graduate without any kind of practical training so skittish employers are hesitant to hire them without some kind of certification.

We have days dedicated to harder themes than wants and needs such as the impact income has on health and opportunity and our final day covers the topics of how much it costs to raise kids, bankruptcy/debt discharge/foreclosure and how economic shifts can leave you hanging despite all your preparation.

Get Rich Slowly is a site I tell all of them to bookmark and to get their parents to read.

What baffles me is when you have two children and one seems to ‘get it’ and the other (especially when the ‘other’ is the older of the two) continues to be completely clueless. My son, who is 11 seems to listen and learn the lessons we are trying to teach. He sometimes even comes up with ideas or insights which are quite impressive. My daughter, who is 14, is so completely clueless it scares me.

This is very common. Some believe there could be a genetic factor. Not that this means a free pass — just as someone with a genetic predisposition toward depression is responsible for managing his or her illness, someone whose money skills are poor needs to find ways to offset the problem.

I will second the point about never saying, “We can’t afford it.” I grew up in a family where money was tight, and we knew it. That sense of financial insecurity stays with you, and it can warp your sense of financial reality. Yes, because of it I save money, but I also deprive myself because I have a constant feeling that I’m broke when I’m not.

So when you tell your child that, you might be giving him or her a dose of reality, but you’re also giving a sense of being out of control. Whereas if you say, “That’s not in the budget,” then the child gets a sense of control and empowerment with money.

I definitely could have used some more financial guidance as a child, but my parents were/are a terrible example.

I did odd jobs as a kid and then starting at 12 was an ice hockey referee. I really hit my stride at about 14. That age onward, I earned thousands a year in earnings. What did I do with it all? Blow it. I bought an Archos MP3 player when MP3 players were rare. I bought my own laptop while I was in middle school – it was well over a grand for a miserable brick by today’s standards. I bought my own Xbox and games. It was my money to save and my money to spend. Luckily it was always cash.

Flash forward to today and having seen firsthand how no real budget or emergency savings pans out in the Great Recession with my parents, I’m the exact opposite. Unfortunately I didn’t learn quite soon enough – I did go to an overpriced out of state private university and graduated with $35k in debt, but I’m working on it and my car note.

The positives are I’ve always paid off my credit card at the end of the month since I was 18 (I mostly ignored it in college except to buy textbooks), I have a great credit score, a ridiculously detailed and automated budget, and am aggressively saving to pay down my debt.

Worst case scenario? The kids zone out and the classes don’t do much. Best case scenario? It actually helps some kids avoid some major financial mistakes.

Guidance would have helped, for sure. In my case, I told my daughter from a young age that when she started babysitting she could keep half the money and the rest would go into the bank. When she got a regular job, she could keep one-fourth of the money and the rest would go into the bank.
She was very agreeable, and there were no fights about money. The summer after high school she was working TWO jobs, and was so busy that she’d often hand me her paycheck and say, “Could you please deposit this?” No request for cash back because she didn’t have time to spend anything.
Had she rebelled and said “it’s my money and I’ll do what I want?” I would have said, “If that’s your choice, then I’m making a choice as well — I will no longer drive you to work, nor will I let you use my car to drive yourself.”
Fortunately, it never came to that.

As long as the bank account balance actually remains the child’s, that seems fine.

I lucked into my paper carrier job (my first job) because the girl who had the route saved over $5,000 in a bank account. As a minor, her parents had control of the money… and they emptied the account to buy her older brother a car for his birthday. She quit as soon as she could.

My high school required a personal finance class only it was called consumer education. The class was a total joke. I had originally tried to pass a proficiency exam but the test was full of details of certain types of insurance and other things that no one really cares about. I was not able to pass the test so I tried to get into consumer ed honors but was not able to fit it in with my other AP and honor classes. I ended up taking consumer education which had a lot of movies that I had already seen so I did not really care about them, a lot of ‘work days’ (which my teacher allowed me to miss because he figured out early on that I would finish everything as soon as I could). I do think that schools should provide some consumer education or personal finance classes but it needs to be real. As in getting a low bill at the grocery store while still buying what you need. It should not be the details of an auto loan or the details of each different type of mortgage. It needs to be relevant for people to care about the class.

And therein lies the rub. Mortgages and auto loans and insurance aren’t relevant to high school students, but they’re really, really relevant to most adults. Getting the wrong mortgage, or failing to get the right insurance, can mess up your finances much more than a poor grocery-shopping strategy can. But because high school students don’t care about those things yet, they think “nobody” cares about them, so it all goes in one ear and out the other.

I don’t know what the solution is, but I’d guess that a useful personal finance curriculum would involve general techniques for critical thinking and finding the information you need when you need it. What kind of information sources are trustworthy, how do you tell whether a salesperson is offering you something you really need or trying to rip you off, that sort of thing.

Years ago I interviewed a high-school teacher who had a personal finance class. He did what I guess was a forerunner of today’s “Broke” game:
–Divided the kids into pairs
–Gave them each a different scenario: married with an at-home mom, dual income no kids, service jobs or professionals, etc.
–Required them to find out how much it would cost to rent an apartment or house, buy a car, put down security deposits for utilities, draw up a budget and shop for groceries (all on paper, of course)
Later he added in lessons about saving for a house, getting a mortgage, managing credit cards, balancing the checkbook, et al.
The kids were shocked — SHOCKED! — to find out how much it cost to live on their own. Some of them didn’t even understand that credit cards charge interest and that the interest will keep growing and growing if you make only minimum payments.
That’s the kind of info I hope today’s youth learn. True, some will zone out in the class and not give a rip. Others will take it to heart. And as regards that “late-maturing brain” theory, some now believe that in the mid-20s or even late 20s the lessons we learned or see modeled around us suddenly go CLICK! Suddenly it just makes sense to start taking charge of your finances.
It isn’t “sudden” at all, of course. But better late than REALLY late.

You said that children should start saving as early as 2 or 3. My son is 2 and he brings my coins and understands that its “money” because I told him it is.

I’ve been thinking about how and when I’m going to teach him about money and get his little savings jar. But maybe we CAN start now….

We are already teaching him to give….he LOVES to walk down the aisle at church and put a dollar in the offering pan.

What do you suggest? Maybe when he brings me coins, let him put in a mason jar or something? I think he is still to young to grasp the concept of value…but maybe that is the first step in teaching it is something that can be stored and saved?

Loved this article. My husband and I recently started doing the cash-only envelope system (and seeing HUGE progress) are actively paying down debt, and are raising a 20-month old in whom we want very much to instill good financial habits at a young age. We have three rental properties that will end up paying for her college. I already plan to start showing her the rental books when she is around 10-12. It can start out as a math lesson. A few years of her helping me do the rental books every month will teach her responsibility. As for our personal budget, she will definitely have an allowance and need to save up for some extras. Our household finances will also be, within reason, somewhat of an open book to her. When I was a child, my parents were quite comfortable and managed their money very well. But my mother had grown up very poor, and it was a treat for her to be able to buy me a lot of extras whenever I wanted them. I didn’t hear the word “no” maybe as often as I should have, and I saw a credit card used whenever I had a whim of something that I wanted. They charged everything for the airline miles, but I was never involved in the household finances. Had I been, I would have seen that the credit cards were paid in full every month. Sometimes, parents can mean the very best for their children, and are financially responsible themselves, but unwittingly raise children who have poor financial habits. So even though I hope to be out of our debt-hole very soon and have the money to spend on all the extras my daughter’s heart could want, I want to be very concious about what financial lessons we impart to her.
And by this comment, I am NOT, in any way, blaming my parents for my financial issues.

My boys are currently ages 3 and 5. They don’t get an allowance (thinking about starting for the older one but haven’t quite figured out how we want to work it) so the money they get is either from gifts, or my older son gets to keep any coins he finds on the floor that fell out of daddy’s pocket and put them in his piggy bank. They enjoy getting to pick things out and pay for them by themselves. They both go to the grocery store with me most weeks, and they already understand about buying on sale. They will ask if the grapes are on sale this week so we can buy some. Or if they ask for strawberries I can explain that they are too expensive right now, but we can buy peaches instead. I use a credit card for groceries, and a couple of times I have gotten to explain to my older son how we get money into our bank account (from our jobs) and how the things we buy with a credit card are not free, we have to pay for them later so we need to make sure we have enough to pay for them. I find that at their ages, the lessons from the grocery store are a great place to start, since there are lots of little decisions we make all at the same time.

Hey Juli, have you checked out MoneySavingMom’s Paid and Nonpaid chores? It’s a great outline for teaching kids to work for their wants and goals, instead of giving them money for doing things they should already be doing (helping around the house, cleaning their room)… ~Brenda

What scares me is the number of fiscally irresponsible adults I know that are modeling the bad behaviors for their children, even if unintentionally. I think there are TWO most important things to teach your kids about money- stay out of debt, and hold some back for the future. It’s not enough to just talk the talk, you gotta walk the walk and demonstrate this lifestyle to your kids as part of your family culture.

I had no guidance about finances, and quite accidentally avoided any major mishaps as a young adult. Even so, it wasn’t until around 30 that we woke up and decided to get rid of the debt and become intentional with our money. Debt free except the mortgage now, and our children, ages 6 and 8, see us budgeting and saving money for various short and long term goals as a regular part of our lives. Will it rub off on them? I hope so. Time will tell!

Kids absorb so much information from their parents habits, so I agree with the “our money habits are formed by the age of 7″ statement. We see and hear how our parents deal with money, and we start learning how money works from the first birthday check from grandma we actually get to keep.

But I’m holding on to the hope that teaching financial literacy in school will actually gain some traction. All I remember learning from my high school Econ class was how to write a check, balance a checkbook, and play the “fake” stock market game. There wasn’t a single mention of student loans, debt, credit cards, interest rates and ways to make money.

Maybe holding out hope for schools to change isn’t smart, and yes parents should teach these things to their kids. But I think it’s safe to say that most of the kids who grow up with bad money habits have parents who aren’t financially literate themselves. ~Brenda

Recently the BBC put out a series of documentaries called ‘The men who make us spend’.

Its all about the Ad men and their ‘assorted plumage’ who sit down and think of schemes how to ‘persuade’, in whatever shape or form, people to spend (all) their money on things they don’t want or need. It covers various subjects among which are,of course, children.

Maybe you can catch it on BBC America and you’ll be shocked and amazed. And not in a pleasant way.

My husband and I are fortunate to be in a much better financial position than either of our families were growing up. But now we look back and realize how growing up in less well-to-do families helped shaped our financial savvy. We know not to live above our means because of the financial insecurity we felt growing up. We gained a lot of character and learned the value of hard work from having less than our peers.

We ask ourselves, “How can we grow that work ethic and self-sufficiency in our kids? Should we pretend to be poorer than we are?” At the same time, we remember the pain of feeling poor compared to our peers and we don’t want our kids to feel that shame either.

Our 6-year-old son gets an allowance and he is required to pay for his own iPad games and toys that he wants outside of Christmas or his birthday. But he never seems to have more than ten dollars at a time, so he can’t have even a fifteen dollar toy that he would love. I wonder if I’m being too heavy-handed making him wait until Christmas or his birthday for something that costs more than ten dollars when it would not break our bank to do that once in a while.

It’s a tough thing. Am I being too heavy-handed? Anyone else been through this?

I’d help him save by using some kind of visual aid — maybe a chart that shows the endgame ($15 toy) and lets him mark his progress toward it. Every time he adds a dollar (or even a quarter) toward his goal, show him how to mark it on the chart.
(Hey, this kind of thing works for the United Way et al.! They put the big wooden thermometer or whatever up on the grounds and keep adding the donations as they come in.)
Myself, I wouldn’t bail him out because he might start thinking he can have whatever he wants when he wants it by pleading or “borrowing” from Mom and Dad.
The other day I was in the store with my nephew and he was looking at a small item that cost about $4. “I could pay you back,” he said.
I said something along the lines of, “I know you’re saving for when we go on vacation, so I don’t want to lend you money for something that you want RIGHT NOW but you’ll probably forget you have within a week.”
He cheerfully put it back and we went on about our day. No whining, crying or screams of, “But it’s MY MONEY! AND I SAID I’D PAY YOU BACK!”
(Good thing, because that kind of behavior doesn’t fly with me. I’d have responded with, “This is unacceptable behavior and we are leaving this store RIGHT NOW.” And then I would have made it happen.)
That said, a couple of times a year I suggest you sit your son down and tell him this: “You know how we don’t get everything we want because we have to make smart choices with our money? Sometimes being careful with money means that our family can enjoy treats, like a trip to the theme park. Or some other special thing.” Then hand him the $15 toy he’s been jonesing for.
I think that his earning it plus the every-so-often MIRACLE of a toy for no reason will make him appreciate his playthings more.
Also: Having that birthday/Christmas thing is a great tactic. If he sees something he REALLY wants you can say, “Well, put it on your list(s) and if you don’t save up for it before your birthday or Christmas maybe someone will buy it for you.”

I taught my son about money when he was little. Any time he got money for a birthday or for doing his weekly chores the “rule” was we put half of his money in your bank account to be used when you go to college.

Every Friday when we got paid he also got paid his allowance. I would help him fill out his deposit slip and we would make a deposit to his savings account. It was a weekly ritual.

Fast forward to college age and his Dad and I “matched” his savings account so he ended up with a good amount of spending money for his first year of college.

He’s in graduate school on a full scholarship plus a stipend thanks to studying very hard as an undergraduate. He’s now and making good financial decisions. He stays with in his budget. He rarely asks for any help from us. I recently gave him a cash gift to give him a little breathing room since he gets paid 11 months of the year and the month with no pay approaches.

I can’t tell you how pleased I am that our son is standing on his own two feet. And he recently told me that it’s important for him to support himself on his limited income.

We used Mary Hunt’s book, Raising Debt Proof Kids, as our model, and I am here to say it worked. Our sons were probably 8 and 10 at the time we started. We sat down together and made up their respective budgets and they were very clear on what the money was for – what they would be responsible for – and what we would continue to pay for. To Johanna – there is no “glee” or setting them up to fail. This was a family decision and the boundaries were clear and they grew as the children grew. Trust me that some of the hardest times as a PARENT is advising your child, watching them choose the hard path anyway, and letting them see the consequence of their choice. But better to do that on a small scale and learn, then in a big way later.

When they both went off to college, I had my eyes opened to the alternative – I sat in an orientation with hundreds of parents who found out that their young adults would be expected to get themselves up for class and perform as adults. They would also be the receivers of their excess financial aid as it was in their name – not their parents. The room went nuts, save for a very few of us. Parents were in disbelief that their children were not going to get wake up calls, and “WHO IN HEAVEN”S NAME GIVES THAT KIND OF MONEY TO KIDS?? THEY ARE GOING TO BLOW IT ON TVS/GAMES/YOU NAME IT!!” So be aware that if you don’t do it, then someone else can force the lessons/consequences on you. It was quite eye-opening to say the least.

Mine are now 24 and 26. They went to college and came out with no consumer/SL debt and both still have none – but I think the siren call of a car is calling my youngest – so we’ll see. At least he is thoroughly thinking it through.

Point is it worked. But one other important thing. We also lived by the envelope system during those years, and they helped us put cash away in those envelopes every payday. They SAW the money go in and out for things that we wanted and needed. We discussed spending decisions and what was more important to us in the long run vs today. We chose the words “we’re choosing to spend our money on this right now” vs “we can’t afford it”. We vacationed as a family, we traveled, we had envelopes for back to school and Christmas, and they saw the peace and the benefits surrounding that process. We all still use “envelopes” today – they’re just savings accounts at ING (CapitalOne360 now).

So – it works, but the reason it works is, 1) We did it. Even when someone was going to make a mistake. 2) We did it at home, where it was regularly discussed and reinforced, and the benefits were experienced. 3) They were ACTIVE participants, not on the receiving end of a lecture. I think this is the reason that the schools are not the best place for this, unless it is a class like the one mentioned above. They have to make real decisions – and be truly engaged.

I really thank Mary Hunt for the ideas – and I would recommend them to anyone. It is up to us to teach our children our values and the lessons of life in age appropriate doses.

Your kids are lucky to have learned these lessons growing up, vs. the hard way later on.
And those parents who expect the college to helicopter their kids the way they have? Yikes.
(I’ve heard that some parents actually DO call their kids to make sure they’re awake for class. Um, what?!?)

I have thought about how if I have kids, at a certain age I am going to pay them a huge allowance, and then a few days later, take most of it back for bills! Because the weirdest thing for me was learning that you get paid XXX but most of it goes right back out the door for boring bills like rent and electricity. When I got my first job I didn’t really have bills so every paycheck seemed like a windfall to spend on whatever I wanted.

Take the household bills and divide them by the # of people and “bill” your kid. “The electric bill was $100 this month so you owe me $25.” That would make young people conscious of the fact that things like electricity, water, heat, do not come out of thin air, and they might start to be attentive and conserve so they get to keep more of their allowance.

Couldn’t agree with you more about this. The parents of one of my closest friends actually took this to heart. They took a strictly no nonsense approach to finances with her from the get go. She had to set reasonable budgets, and they worked with her to set a good weekly allowance based on the things she did around the house for the family. She was way ahead of her peers when it came to handling her money in college, and that meant coming out with no student loans.

My congratulations to her. Finishing school with no loans is a tremendous advantage. No doubt a lot of her peers are struggling to make bank each month.
I keep thinking about the opportunity cost. How much more could be done with a young life with that extra money and the lack of stress?

Loved the article. This one is relevant to people across the world. In today’s time when plastic money is so prevalent its getting very difficult to teach kids the importance of money. I’m going to use your article as base to write one for the parents in India. As some context change with culture. However I will surely give you the credit for this article. Its simply superb. Kudos to you.

Thank you, GRS and Donna! My husband and I have been teaching our kids about personal finance since they were old enough to understand the basic ideas. We are always on the lookout for up-to-date, rational advice, and this is so much appreciated. We live in Virginia, and our sons will receive a PF class at school, but I know they look to us as role models. The financial stresses for our middle class family sometimes seem staggering, but facing them with good information and some knowledge is certainly better than ignoring the ant hill only to later discover a mountain.

Your sons will learn a lot watching you deal with those stresses and come up with workable compromises.
The middle-class aspect can be a real issue, as our kids feel a lot of pressure to have all the stuff they see on TV (or in the halls at high school). Stick to your guns! Help them address why they want (or think they want) certain items, and brainstorm ways to get them affordably: buying a refurbished phone, say, or using a price comparison website to get the best possible deal.
By the time they save enough they may decide they don’t really want the item as much — that they’d rather have the money. (It happens.)
They’re lucky their parents are being proactive — they won’t end up as helpless as the youths about whom Margaret spoke in comment #42. Perhaps those parents meant well, but they infantlilized their children. That’s no favor, either to the young people themselves or to the society in which they live.

I was a single parent with a demanding job and 3 kids. When I got a raise I would sit down with the kids, explain that I had my annual(or semi annual) review and had gotten a raise. Then we would discuss how I was able to be successful at my job because they pulled their weight with chores, and I didn’t have to leave work early some days to meet with teachers or the principal. Then I would raise everyone’s allowance. I felt they helped me earn it. And they felt so also.

I like this approach so much that I would date it if I could. Kudos to you for helping your children see that money does, indeed, come from work — and also for recognizing and rewarding their contributions to the household.

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